Vacation Loans: Should You Use a Personal Loan to Pay for Your Vacation?

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A vacation loan is simply another name for a personal loan. Personal loans are generally unsecured loans that individuals can use for a variety of purposes, including travel, debt consolidation, weddings, home improvement or medical expenses. While personal loans may be necessary sometimes, we don’t recommend individuals take out a loan to pay for travel. Vacations are a luxury expense that should be paid for with cash.

What Is a Vacation Loan?

A vacation loan is just a personal loan. Lenders may advertise vacation loans, but they function in the same way as a personal loan. In general, you can borrow up to $40,000 for a personal loan with annual percentage rates (APRs) between 5% and 36%. Personal loans are typically offered in terms from one to seven years with fixed monthly payments (they are amortized loans). Most personal loans are unsecured, meaning you do not need to put up collateral to get the loan. The one exception to this is if you have a very low credit score. Some lenders will allow you to apply for a personal loan with a cosigner or co-applicant.

How to Get a Vacation Loan

You can get a vacation loan from a bank, credit union or online lender that offers personal loans. Lenders generally have few restrictions on how you can use a personal loan (notable exceptions are for education or business purposes), so you should be able to use a loan for your trip. Interest rates for vacation loans are based on your creditworthiness and debt-to-income ratio. While rates can start as low as 5%, our research found that even borrowers with excellent credit and little debt may only qualify for a rate as low as 10%. For instance, a borrower with good credit may receive a 10.5% APR on a $5,000 three-year loan, which would have a monthly payment of $162.51.

Online lenders, in particular, may also ask for your employment and educational history during the application process. They may ask you to fill information related to your highest level of education, degree and major, current job title, previous job titles and salary. You may also be asked to provide contact information for your employer and references. Lenders look at this information to bolster your application, especially if you have thin credit history or a less than stellar score.

Should You Get a Vacation Loan?

“Any financial advisor worth their credentials would give an emphatic ‘no’ to using loans, or in other words, go into debt, to go on vacation,” says Ryan Miyamoto, CFP and founder of Derive Wealth, a California-based wealth management firm, “Why? It promotes bad habits.” Using a loan to pay for unnecessary expenses, like travel or weddings, can be a slippery slope to poor financial habits, such as spending more money than you have. In general, vacations should be paid for with money you already have, and if you don’t have enough money, you need to save up until you do.

Taking out a personal loan also means being stuck with a monthly payment for years to come. Even in our example above, a $5,000 three-year loan with a 10.5% APR would mean a $160 monthly payment for three years. Do you really want to be paying that amount for the next three years of your life? Probably not. Unlike some necessary or acceptable forms of debt (such as a mortgage), a trip is a luxury item that should not be financed through a loan.

However, if you absolutely must borrow money to pay for your trip, a personal loan is a better alternative than accumulating debt on credit cards. This is because a personal loan gives you a fixed amount to work with and has predictable monthly payments. Credit cards, on the other hand, don’t set a limit on your spending (beyond your credit limit), which can easily tempt you into overspending. But, we still don’t recommend either strategy for paying for travel, even for financially responsible individuals. Think about it this way: even if you can pay off the loan or credit card easily, you are still accruing interest on your vacation. If you pay for the trip with money you already have, you’ll avoid paying any interest.

Other Strategies to Pay for Your Vacation

Financing travel with a loan is generally not a good idea. However, there are many ways you can save up money and cut costs to afford your vacation:

Cut costs and automate savings

Create a travel budget

Take advantage of credit card points

Be location-agnostic and look for flight deals

Cut Costs and Automate Savings

If you don’t have a monthly budget, you may be surprised when you take a hard look at your spending habits. For many people, there’s at least $50 to $200 a month in unnecessary spending that one could easily put toward a trip. Take, for instance, a habit of eating out for lunch every day. If lunch costs $8 a day, and you eat out five days a week, that amounts to $40 per week and $160 per month. By packing your lunch, you could easily save over $100 per month -- and that’s an extra $100 per month toward your vacation. Beyond eating out, consider cutting costs by reevaluating your gym membership, TV cable package, subscriptions, clothing purchases and entertainment expenses.

Once you’ve identified areas where you can trim the fat, set up a separate savings account to save for your trip and automate transfers into this account. If you’ve managed to find an extra $200 per month in your budget, make sure to transfer this amount to your vacation account. Your best bet is to have the amount taken out of your paycheck or taken out when direct deposit hits your checking account. This way you won’t even know the money is missing.

Create a Travel Budget

When planning a trip, most people already know to budget for airfare or travel costs and hotel costs. However, being on vacation means you will incur a lot of other expenses. You may be eating out more while traveling than you normally do, so you’ll need to budget extra money for this expense. You’ll also need to budget for any tours, entrance fees or other money spent on visiting sights, museums and landmarks. If you want to purchase souvenirs, this is an extra line item in your budget. It’s also a good idea to budget extra money in case of emergencies or unexpected situations.

Similar to making your monthly budget, you should trim the fat from your travel budget. For transportation costs, consider alternate modes of transportation that may be cheaper. If you’re traveling to Europe, for example, taking the train may be more affordable -- and less stressful -- than renting a car. For lodging, you can save a lot of money by opting for an Airbnb, bed and breakfast or a smaller hotel instead of a chain hotel. And while it’s tempting to eat every meal while traveling, you can save a lot of money by grocery-shopping like a local.

Take Advantage of Credit Card Rewards and Airline Miles

Many Americans don’t take advantage or enough advantage of their credit card rewards. These rewards can take the form of simple cash back or points that can be redeemed for travel, hotels, airfare or other expenses. If you have a bunch of credit card points, look into using these points to pay for some or all of your trip. These points can usually be redeemed through the credit card issuer or transferred to travel partners, such as airlines or hotels, to redeem on their website.

If you have existing miles or points with an airline or hotel chain, you should consider cashing in some of these for your vacation. You can book award travel on most major airlines with domestic fares starting as low as 15,000 points and international fares starting at 25,000 points. Depending on what credit card you have, you may be able to transfer your credit card points to the airline’s program and combine your miles into one account. Many hotel chains offer similar rewards programs with nights starting as low as 5,000 points per night.

Be Location-Agnostic and Search for Flight Deals

Websites like The Flight Deal and Airfarewatchdog post daily flight deals and fare glitches from major U.S. cities to both domestic and international locations. Many of the airlines will also post flight sales and deals on their own websites. If you’re not tied to visiting a particular place, you can score a great deal on a flight. For instance, when we checked fares, we saw domestic round trip flights for $96, round trip flights to Central America for $260 to $330 and round trip flights to Asia for $550. Many of these deals will come with restrictions -- you may only be able to fly on certain days of the week or between certain dates. However, for flexible vacationers, this can be a great way to save a ton of money on airfare.

Madison is a former Research Analyst at ValuePenguin who focused on student loans and personal loans. She graduated from the University of Rochester with a B.A. in Financial Economics with a double minor in Business and Psychology.

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